What is Negative Balance Protection?

Negative balance protection (NBP) is a relatively straightforward concept. It simply means that you can’t lose more money than what is in your account. For example, if you have USD 1000 in your account, you can’t lose more than that.

Imagine you have USD 1000 in your account and enter a CFD trade with 5:1 leverage. That would give you a position size of USD 5000, and if it suddenly dropped by 50%, you would be looking at a USD 2500 loss. Given your initial balance of USD 1000, that would leave a shortfall of USD 1500, and you would be liable to pay the broker if your account did not have NBP. Moreover, you could be liable to pay interest on any debt, increasing the cost even further. However, if you trade with a broker that provides negative balance protection, your loss cannot exceed the deposited sum of USD 1000.

NBP is particularly important for new traders, who may be unfamiliar with how rapidly markets can move during general market volatility, at the opening and closing of the trading day, or in response to unexpected news.

NBP also allows new traders to try out different trading strategies knowing that they won’t go into debt. At the same time, taking advantage of NBP does not limit potential gains.

Not all brokers guarantee NBP

Brokers in some, but not all, jurisdictions are required to provide NBP. While providers of leveraged products in the UK, the EU and Australia must, by law, provide NBP, brokers around the world are not subject to the same requirement.

Moreover, while brokers in other jurisdictions may say they offer negative balance protection, you may have to request it. That’s because NBP won’t always be offered automatically when you open an account. So, before selecting a broker, you should research prospective firms carefully to find the policies and services that best fit your needs. Remember that if you opt for a brokerage firm that does not offer negative balance protection, you are exposing yourself to unnecessary financial risk. That is easily avoided by choosing a broker that guarantees NBP.

Some brokers seek to entice new customers to open accounts by offering NBP for an introductory period only. When researching brokers, you should ensure that the broker you are considering does not offer negative balance protection only for a trial period. That’s because once the grace period expires, you will be liable for any negative balances carried by your account.

Offshore regulators and negative balance protection

The availability of negative balance protection varies across offshore regulators. Amid a general tightening of the regulatory regime in 2020, the Securities Commission of The Bahamas announced that brokers registered in its jurisdiction would be required to offer NBP to clients. However, neither the Financial Services Commission of Mauritius, the Financial Services Authority of Seychelles, nor the Financial Services Commission of Belize require brokers to offer NBP. Always check with your broker's customer service before trading to see if your account is protected.